(FINA361)[2009](f)midterm~2047^_10340.pdf

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Hong Kong University of Science and Technology

October 12, 2009

FIXED INCOME SECURITIES (FINA361) Mid-term Exam

Question 1

A 4-year 5.8% bond is selling to yield 7%.The bond pays interest annually.

1. What is the price of the bond?

2. What is the price of the bond one year later? Assuming that one year later interest rate decreases from 7% to 6.2%;

3.

What is the price of the bond at the end of 1st year?

4.

What would be the internal rate of return assuming that you will sell this bond at the end of 1st year?

Question 2

Consider the following two bonds A and B.

Bond Price Modified Duration

A 100 5

B 80 6

1.

Which bond has the highest price volatility in terms of percentage change in price?

2.

Which bond has the greater dollar price volatility for 20bps change in yield?

Question 3

A 6-year 5% bond is selling to yield 6%.The bond pays interest semi-annually. Using the approximate formula

5.

What is the duration for 10bps change in the yield?

6.

What is the convexity for 10bps change in the yield?

7.

What is the price of the bond for 150 basis points decrease in the yield?

Question 4

The PVBP is defined as the dollar price change for 1 basis point. The following bond has a modified duration of 4, price of 98, and yield 6%.

1.

Calculate the PVBP that is the dollar value of one basis point.

2.

Accounting for duration only, what would the new price of this bond be if the yield goes from 5% to 4.8%?

3.

Accounting for duration only, what would the new price of this bond be if the yield goes from 5% to 4%?

4.

Which of the prices calculated above is a better approximation of the real price? Explain why.

Page 1

Hong Kong University of Science and Technology

October 12, 2009

Question 5

Bond B has greater convexity than Bond A. Which of the following is true;

1.

Bond B offers a higher yield than Bond A

2.

Bond B offers a lower yield than Bond A

3. Bond B offers a same yield as Bond A Please explain why?

Question 6

We observe the following forward, spot and par curves. Period Year Forward rates Spot Rates Par yield

1 0.5 4.25 ? 4.25

2 1 4.75 4.50 4.50

3 1.5 5.28 ? 4.75

4 2 5.79 5.02 ?

5 2.5 6.32 5.28 5.25

6 3 6.87 5.54 5.50

7 3.5 7.43 5.81 5.75

8 4 8.01 6.08 6.00

9 4.5 ? 6.36 6.25

10 5 9.22 6.65 6.50

1.

What is the 6months forward rate starting after 4years and half?

2.

What are the missing spot rates?

3.

What is the corresponding 2-year par yield?

4.

What is the price of a government bond that pays 5% coupon semi-annually, 4years maturity with par value at maturity? (Hint :The cumulative discount factor for 8 period is CDF8=7.11)

Question 7

Which of the term structure theories cannot explain an inverted term structure of interest rate? Explain why.

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Hong Kong University of Science and Technology

October